The Private Investor: All the glitter has not worn off gold trading

Is the gold game over? A haven for frightened investors from time immemorial, gold has had a good run since 11 September. But this week stock markets have begun to regain confidence as they got scent of victory in Iraq, and gold's allures dulled.

Is the gold game over? A haven for frightened investors from time immemorial, gold has had a good run since 11 September. But this week stock markets have begun to regain confidence as they got scent of victory in Iraq, and gold's allures dulled.

City equity dealers have got their swagger back. So great was the change of sentiment as equity trading volumes rallied that in one bar I overhead dealers talking enthusiastically, only partly in jest, of the opportunities in Baghdad. And not just on the local stock market, but property markets and reports of rising prices there too. It makes a change from what's happening in Essex.

So funking into gold is out for now. The price has tumbled, although in volatile trading and to a large extent reflecting the rising US dollar as the gold price is always quoted in dollars.

I have never entirely bought the gold story myself. I remember chats back in the early Eighties with a major London trader while gold was falling from the all-time peak of $850 an ounce. Do not forget he said, that the Arabs, historically major buyers, are sending their sons to the likes of Harvard and Massachusetts Institute of Technology these days. They use modern investment techniques now, and gold bars do not feature large in their portfolios.

Latest to ditch gold is that other major market, India. Demand fell by 36 per cent last year. India had ambitions to be the world's trading capital in the yellow metal. But the rise from 2001's $270 to the recent $381 high swamped the Mumbai market with chests full of bangles and necklaces. International dental demand is holding up, but there is a limit to how much gold our mouths can take.

More promising for gold buffs is Malaysia's plan to develop a gold-based Islamic currency. Malaysia's bitter accusation is that dollar-based globalisation was behind the 1997-98 Asian meltdown. After the Iraqi war, anti-Americanism in the Islamic world could just bring enough backing for this cumbersome scheme. Malaysia wants to price oil in gold, which would have huge repercussions.

Gold has a long history as a hedge, and it would be wrong to dismiss it. As the analysts at Morgan Stanley say, prospects for the world economy do not look bright after a war, and gold will be back in fashion then, with the prospect of another price hike. The Morgan Stanley team like several of big-cap mines. Their share-price targets for Anglo-American, BHP and Rio Tinto are 950p, 350p and £13 respectively, jumps of 9,3 and 13 per cent. That would give total returns, including dividends, of 7,15 and 9 per cent.

Rio Tinto is the preferred core mining holding of European as well as UK fund managers, so is expensive. It does have some diversification, with 25 per cent of earnings coming from iron ore. I like BHP's story better. It has a wider asset base, a strong balance sheet, a rising dividend and in past times of economic uncertainty has traded at 395p a share.

At the smaller end of the gold market, the broker Evolution Beeson Gregory goes for a pure gold play, Rangold, which has high-grade earnings. It has had a good run, but trades at only six times forecast earnings against many of its peers, where the average forward multiple is over 20.

A risky, if fun, stock, in that it seems to get a lot of coverage so you hear what is going on, is Peter Hambro Mining. Set up and run by a scion of the Hambro City banking family, the stock reflects good trading judgement in its timing at least. It was over-subscribed at its float on AIM in April 2002 and reached 130p. Last week it got away a placing to raise £16.8m for new developments at 175p. This is very much a Russian stock, exposed to all those risks.

To play safer go for a fund to get a spread of stocks and the help of an experienced stock-picker. The leader is Merrill Lynch World Mining Trust, run by Graham Birch. He concentrates on larger miners and favours South Africans and Australians, so holdings are top-drawer. While it may not be able to repeat the rocket-propelled performance on the back of last year's rising gold price, it is solid and on a discount of around 13 per cent to a 135p Net Asset Value.